Who’s talking about budget cuts?

posted at 11:20 am on July 12, 2011 by Ed Morrissey

The negative corollary to Keynesian economics seems to be popping up frequently in the debate over the debt ceiling and budget deficits. Instead of arguing that increased, targeted government spending provides multipliers for job creation in the private sector, we’re now hearing that massive budget cuts will create a new recession and kill millions of jobs. Bruce Bartlett makes that argument in the New York Times, warning conservatives not to repeat the lessons of 1936-7:

Given President Obama’s endorsement of large budget cuts, the only question now appears to be how much fiscal policy will tighten and how fast. If it is back-loaded and mainly involves cuts in transfer programs, the impact on growth may be modest. But if – as I suspect Republicans will demand – the spending cuts are front-loaded and involve reductions in government consumption and investment spending, the impact could be severe.

While it’s unlikely that the Fed will repeat its error of 1936-7 and raise reserve requirements or the federal funds rate, it has already begun de facto tightening by moving from monetary stimulus to a more neutral stance. Moreover, with interest rates on Treasury bills hovering near zero, there is little it can do to stimulate growth on the monetary side.

Well, perhaps we’d be repeating an (arguable) error — if in fact anyone had proposed an actual cut in spending. As Nick Gillespie points out at Reason, the only proposals from either side involve a reduction in the growth rate of the federal budget, not reductions in spending:

Precisely who is calling for actual budget cuts right now? The correct answer is zero. That’s certainly true in the near term and all the trims (believe ‘em when I see ‘em) are from future increases in spending. The two budgets that are being debated remain Obama’s, which grows federal spending from about $3.8 trillion this year to $5.7 trillion in 2021, and Paul Ryan’s, which grows it to $4.7 trillion. Even factoring in the current arguments over the debt limit, nobody is talking about taking this year’s budget and cutting from it. That’s why they keep yapping about “deficit reduction,” which will take place somewhere down the road, at the intersection of Bushwah and Malarkey. …

Contra Bruce, there’s a strong case to be made that government austerity is precisely the tonic our sick economy needs. But whether you agree with that, there’s currently next to no chance that we’ll ever get a chance to find that out. If the first step of getting out of a jam is to use basic descriptive language, well, we’re not even talking yet.

We are having a similar argument in Minnesota. The governor shut down the government and claimed that Republicans wanted to cut government spending and reduce tax revenues. However, the budget produced by the Republican-led legislature actually increased biennial spending by 6% in real terms. The budget went from just under $31 billion to over $34 billion, which includes transfers to cover some costs from the previous biennium. Dayton calls this a cut because he wanted a series of auto-pilot increases to remain in effect, which would have produced a $37 billion biennial budget. Republicans literally met him halfway, and did so six weeks before the end of the session. Dayton waited until the session concluded to veto all nine budget bills and shut down the government.

It’s not just the spending side where the definition of “cut” is suspect, either. Over the weekend, the local Pioneer Press editorial board pointed out that, contra Dayton, the Republican budget actually increases revenues as well, by 6%:

Actually there is quite a lot of new revenue in the Republican proposal. Their plan is based on $2 billion of new revenue generated by the current tax system. Comparing last biennium to this, that’s a 6 percent increase in revenue in a low-inflation environment. Inflation is projected to be a modest 1.7 percent and 1.8 percent per year in the upcoming biennium, according to projections from the Minnesota Management and Budget office. So the 6 percent revenue increase works out to twice the rate of inflation.

And here’s a tidbit you may not have heard. Not only is revenue up 6 percent, individual income tax revenue is projected to be up 17 percent.

Gov. Mark Dayton is focused on the very tax category that is already projected to be up 17 percent to the prior biennium. According to MMB, nearly two-thirds of this increase is due to capital-gains increases based on the “extension of the special 15 percent federal tax rate on capital gains.” Which means the “rich” – the folks who tend to pay capital gains taxes – are paying significantly more in income taxes as a result of their capital gains tax rate remaining low. The obvious irony being that the rich are paying more because their tax rate stayed low, which is the exact opposite of the Dayton approach.

Capital gains is a special kind of income, but it is also a case study in howpeople shape their income on the basis of tax policy. When you tax something, you get less of it. And when you tax millionaires there will magically be fewer of them.

The governor, on the other hand, proposes to spend an additional $1.8 billion above and beyond the already 6 percent increase in revenue, or four times the rate of inflation.

There might be an argument that actual reductions in government spending would create a recession where one wouldn’t have occurred. Bartlett says that’s what happened in 1936-7, but one would have to show that the US had a recovery between that and the start of the Great Depression, which would be rather tough to do. In any case, we’re not going to be able to test that theory under any of the proposals floating around Washington, not even Ryan’s much-maligned proposal, because no one in Washington is seriously entertaining actual budget cuts. They’re all working under the Beltway definition of “cut,” which is “a reduction in the increase we proposed to spend.” (photo via MinnPost)

Update: One state worker says that Dayton should skip his driving tour of Minnesota this week and get back to work:

Altendorfer wants the Dayton and the Republican leadership to put aside their differences and get to work on a budget, no matter how long it takes. That means, she said, working all day, all night, every day.

And she especially doesn’t like the Dayton’s plan for a multi-city speaking tour.

“Forget it!” she said. “Get back and get the job done. I mean come on! How can you be on the road when you should be at the Capitol getting the job done?”

Blowback

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I don’t know the math but couldn’t we just cut, across the board, a percentage off of every dollar going out? That way nobody takes a big hit but everybody shares in the so called sacrifice to get things back on track.

Ed – did you have to post that picture. My beloved maroon and gold should never be seen in the same picture as Dayton/Obama. It’s bad enough Williams Arena was the site of the Wellstone memorial.

gophergirl on July 12, 2011 at 11:24 AM

The WELLSTONE MEMORIAL?!!!!!

You mean they actually wasted state money to build a memorial to that insipid little twerp?!!!

pilamaye on July 12, 2011 at 11:29 AM

CORRECTION TIME! Made a major misunderstanding here. Now understand that Williams Arena was the site of the Wellstone memorial-turned-idiotic-Democrat-pep-rally from way back when. Now understand there is no PHYSICAL memorial set up for Wellstone.

YET!

Because as long as Dayton is still Governor, there could still very well end up being one someday.

But if – as I suspect Republicans will demand – the spending cuts are front-loaded and involve reductions in government consumption and investment spending, the impact could be severe….

The term “government investment spending” is pure propaganda. Very little, an insignificant amount, of federal government spending is ‘investment’, meaning that which can result in a positive benefit with respect to the initial amount spent.

Here’s a credible shot at what happens if we don’t raise the debt ceiling and have to run the US government on actual revenue only: Debt Ceiling: Worst-Case Scenario

“… In round numbers, the federal government would have to live on what it did in 2005. It would not have to be the end of the world. It certainly would not have to mean default. In fact, it is disingenuous to conflate not raising the debt ceiling with defaulting on sovereign debt …”

Because this is a political site, and the Minnesota DFL is too stupid to advertise only to MN residents visiting a political site (assuming you’re not a MN resident).

When running ads like that, you can target on both topic, keyword, and/or location. I don’t usually see the option to target just liberal or conservative sites. You’d also be kind of surprised how little control you end up having over the ads that run on your site, if you’re trying to fill as many of the ad views you have as possible.

CORRECTION TIME! Made a major misunderstanding here. Now understand that Williams Arena was the site of the Wellstone memorial-turned-idiotic-Democrat-pep-rally from way back when. Now understand there is no PHYSICAL memorial set up for Wellstone.

YET!

Because as long as Dayton is still Governor, there could still very well end up being one someday.

pilamaye on July 12, 2011 at 11:37 AM

gophergirl was talking about Wellstone’s memorial service, but, there is a Wellstone memorial near the site of the plane crash and it did cost us about $300,000.

According to Obama, he’s talking about spending cuts — with his proposal to increase taxes. Higher taxes = lower spending, because as we all know, government is spending money when it lets us keep some of what we earned.

Imagine your son off to college has maxed out his credit card and he asks you to increase the limit. You head to campus to see whats up. At his apartment are 4-wheelers, Jet skis, plasma tv’s and all the latest high tech stuff which he insists is all vital to his schooling.

You say you’ll increase the card to pay his debts but we’re gonna have a garage sale to get rid of some of the debt. He refuses and demands you pay more even if you have to get a second job. You refuse and he says ok,ok, I’ll let you sell this Ipod but I get to keep the rest, and by the way there is this cool Corvett I’ve got on layaway that you’ll start paying for in 2014.

And there stands you’re wife (the media) saying “oh honey, let him keep his stuff.”

MKH made the same argument on BOR last night; though Bill, as usual, talked over her and basically called her silly for suggesting that real spending cuts aren’t being discussed.

It’s the typical liberal argument against decreased spending and it almost always follows the same pattern: Initial budget proposals include (say) $10B for the EPA. The GOP wants to negotiate that down to $8B and the current years budget allows $6B. Liberals always scream that the $2B is actually a cut in spending when in fact, it’s an increase.

It’s the typical liberal argument against decreased spending and it almost always follows the same pattern: Initial budget proposals include (say) $10B for the EPA. The GOP wants to negotiate that down to $8B and the current years budget allows $6B. Liberals always scream that the $2B is actually a cut in spending when in fact, it’s an increase.

This is why the dumbest in our society always support Democrats.

BKeyser on July 12, 2011 at 12:06 PM

It’s even worse than that. When the budget or fiscal year is winding down and an agency hasn’t spent all it’s allotted funds, they pretty much give the money away.

They have to do this to justify receiving more funds in the next budget. Remember when Congress was giving bonuses to their staff because they had a surplus of money?

“In my view the president has presented us with three choices,” said Senate Minority Leader Mitch McConnell, R-Ky., referring to efforts to raise the $14.3 trillion debt ceiling. “Smoke and mirrors, tax hikes, or default.”

“Republicans choose none of the above,” McConnell said. “I had hoped to do good; but I refuse to do harm.”

Instead of doubling down with their current plan they should instead give the democrats a new plan that Does Include Actual Budget CUTS! That would make the media, the 0bamaBots, and America really wake up to the facts. ;o)

The Fed …. has already begun de facto tightening by moving from monetary stimulus to a more neutral stance.

Thereby fulfilling verbatim the predictions of 2008-09, when conservatives said with absolute certainty that the ridiculously inflated federal spending in the stimulus would come to represent the new baseline, contra the liberals who insisted it was a one-shot deal to Save America.

We’re already at the point where a “cut” means growing the government by less than it had been growing. If this Orwellian game keeps up, a “cut” will soon mean increasing spending by a higher rate than ever before, but by less than liberals wanted.

There might be an argument that actual reductions in government spending would create a recession where one wouldn’t have occurred. Bartlett says that’s what happened in 1936-7, but one would have to show that the US had a recovery between that and the start of the Great Depression, which would be rather tough to do.

Bartlett’s also ignoring the Depression of 1920-21, which saw US GDP contract 25%, with high unemployment and inflation and huge government debt. The Harding administration slashed taxes and government spending, stopped bashing business, and the result was nearly ten years of immense prosperity.

While not the best source on the planet, you can get decent GDP numbers at W-pedia and check them yourself at other sites on the GDP of the US during the Great Depression. The rock bottom of the economy hit in 1933-34 and by late ’34 it was on the rise again. That rise was pretty much a straight line up from late ’34 to 1937 and actually goes over the average GDP growth rate seen prior to the crash of 1929. That is to say the economy had recovered (though jobs had not done so) by 1936-37.

What had been put in during the 1933-34 legislative sessions were a number of programs and agencies meant to ‘regulate’ the ‘big banks’. The SEC, though done just prior to that, was standing up in full during that period of time. One of the biggest costs was SSA which made raised the cost of each worker via putting in the cost of SSA. Together with banking regulations, economic regulations and social programs the recovery that had started in 1936-37 then went under the GDP pre-crash trendline until 1940. What is telling is that unemployment numbers went up during this period of time, adding on to the general misery of the overall Great Depression.

When you examine later recessions these numbers make sense as the first thing to increase is productivity per worker, which then stimulates economic activity and allows for an increase in the workforce, overall. When the cost of borrowing, doing business and employment all rise then you have counter-vailing trends to a recovery. That is why you don’t raise taxes, increase the size of government, put in new fiscal controls or otherwise make it harder to borrow for reputable borrowers. When government starts to pick winners and losers, then those that are not economically efficient can get rewards and exemptions, while those who are not are then punished via new regulations… which lowers productivity and economic output by no longer rewarding the former which garners the latter.

If these things are not understood it is because they are not talked about much outside of economics circles as the Progressives have put a halo around FDR and somehow put forward that it was evil businesses and banks that were to blame for the mess. That brings forth big time, pump-priming spenders who can’t figure out why draining water from the pipe before it gets to the spigot makes it harder to prime the pump in the first place… then they want to add more spigots and take more water from the pipe…

The re-analysis post-Progressive agenda economists now churning on the raw numbers from the Depression Era are painting a very different picture of it than we have been handed for the last 70 years.

Dayton calls this a cut because he wanted a series of auto-pilot increases to remain in effect, which would have produced a $37 billion biennial budget.

The movie cameras roll. Crowds of onlookers cheer. The car is careening toward the cliff with cruise-control set at a high rate of speed. Adrenaline surges!

Democrats fight aggressively to keep the cruise-control set. It’s good to go fast! They’ve seen all the movies where the actor jumps out of the car just before it goes over the cliff… and want to be just as cool as that actor.

Republicans are trying to turn off the cruise-control because there’s no reason to race in the first place. They hope the Dems will get caught and not get out in time and they will “win” by default.

Conservatives are trying to hit the breaks because its not a car, IT’S OUR COUNTRY!

The political elite are caught up in the speed and excitement of the race, and trying to “win”. Conservatives realize that this race to the cliff edge can only end in disaster, and we shouldn’t be trying to achieve disaster!

Interest rates on treasuries are hovering about zero only because the Fed has been buying most of these bonds under QE2. When they stop, interest rates will be a function of market forces and the price of servicing the debt will sky rocket. Unfortunately, most of our debt is short term which means we will have to reissue 2+ trillion a year at these new rates just to stay even.

And tell that dingbat from Minn that the legislature can’t go back to work unless the governor calls a special session, something he has refused to do.